Apr 13, 2023
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“People who exit the stock market to avoid a decline are odds-on favorites to miss the next rally.” – Peter Lynch
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Yesterday’s weaker-than-expected headline CPI for March didn’t ultimately do much to boost the market, and today the focus will shift to the PPI which is expected to come in unchanged m/m at the headline level and increase 0.2% on a core basis. Along with PPI, jobless claims will also be released, and those are expected to increase to 235K from 228K last week. After weeks of thinking that initial claims were stuck below 200K, we learned last week that after benchmark revisions claims have actually been above 200K for nine straight weeks and 18 of the last 20. Amazing how some revisions can have such an impactful change on the narrative.
We don’t know what to call what the market has done over the last six months, but yesterday did mark the six-month anniversary of the October low. The S&P 500 is up 12.6%, and its peak performance was a gain of 14.4% as of February 2nd before the stronger-than-expected January employment report sparked a sell-off of nearly 8%. During that decline, the S&P 500 managed to stay above its prior low from December, and in the rally that followed it has yet to even test its February high. That’s just another reason we don’t know what to call what the market has done over the last six months. New bull market? Bear market rally? We are in a bit of a no man’s land.
The chart below shows the performance of the S&P 500 and its industry groups since the 10/12 closing low (blue bars) and each one’s peak performance from the close on 10/12 (gray bars). Semis have been leading the way higher, and it’s not even close. Through yesterday’s close, the group was up over 50%, and at its post-October peak, it was up just shy of 60%. Behind Semis, the only other groups in ‘bull market territory’ (up 20%+) are Consumer Durables, Consumer Services, Software, and Capital Goods.
With only five groups up 20%, it’s not the type of performance you would expect to see if this was a bull market, but at the same time, there has been nothing normal about anything market or economic-related in the last three years. While only five groups are currently up 20%, 14 of the 24 have been up at least 20% relative to their 10/12 close at some point since then. The fact that Semis have led the advance is probably one of the most encouraging characteristics of the market’s performance over the last six months. The group is one of the most cyclical of them all and the best leading indicator for the broader market.
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Apr 12, 2023
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“Simple can be harder than complex: You have to work hard to get your thinking clean to make it simple.” – Steve Jobs
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Investors took an optimistic tone heading into the release of March CPI with futures marginally higher. Headline CPI came in at 0.1% m/m which was less than the 0.2% forecast. Core CPI increased by 0.4% which was right in line with forecasts. On a y/y basis, headline CPI was 5.0% versus estimates of 5.1% while core increased by 5.6% which was right in line with consensus forecasts. The immediate response in the futures market was higher equities and much lower yields as the 2-year drops back below 4%.
CPI reports have become increasingly important in the eyes of market commentators in the post-COVID environment. From an outsider’s perspective, you would think that these are the most important days of the month. Looking at the actual data, though, CPI reports may not necessarily be as impactful as you would originally think.
The chart below compares the S&P 500’s median daily percentage change on all market days versus CPI days for three different periods. First, for all days since 2000, the S&P 500’s median daily change is the same for all days versus CPI days (0.55%), so we can consider that the baseline. Since the start of 2020, when COVID first started showing up in the headlines, the S&P 500’s median daily percentage move on all days has been 0.74% versus 0.59% on CPI days. In other words, in the post-COVID world, the S&P 500 has been less volatile on CPI days versus all market days.
Where the stock market has become more volatile on CPI days is since November 2021 when Fed Chair Powell retired the term transitory. From then until now, the S&P 500’s median daily change has increased to 0.88% while on CPI days, it has risen to 0.95%. So, yes CPI reports have taken on an added significance, but they may not be as impactful as you would think from the headlines. CPI day or not, in the post-COVID world and even more so in the post ‘transitory’ world as the Fed aggressively hiked rates, the market has become more volatile on all trading days. This morning, the CPI report is the most important release of the year so far, but by this afternoon, it will have faded well into the rearview mirror.
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Apr 11, 2023
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“What are the odds that people will make smart decisions about money if they don’t need to make smart decisions—if they can get rich making dumb decisions?” – Michael Lewis
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It’s looking like another quiet start to the trading day here in the US as equity futures are little changed and the yields on two and ten-year US Treasuries have moved less than a basis point. The only economic report on the calendar today was the NFIB’s index of small business sentiment, and while it was slightly better than expected, the headline index declined and remains below where it was at the depths of the COVID shutdowns. Within that report, the percentage of small businesses saying now is a good time to expand dropped to levels only seen at the depths of the Financial Crisis in March 2009 while the index for hiring plans dropped to its lowest level since May 2020. In other words, small business sentiment is not particularly optimistic. We’d also note that within the latest Commitment of Traders report, net short positions on the S&P 500 reached their highest level since 2007, so it’s not as though investors are positioned bullishly against the weaker macro backdrop.
In Europe, Retail Sales for February fell 0.8% on a m/m basis, but that was actually in line with expectations. Stocks on the continent are modestly higher after yesterday’s holiday
As recession concerns have grown in the wake of the SVB Financial and Signature Bank failures and the run of deposits from other smaller banks, investors have become increasingly convinced that the indicators which have been flashing recession warning signs for months now may in fact turn out to be accurate. If the economy was slipping into recession, one would expect to see those concerns manifesting in the performance of cyclical sectors. Specifically, Industrials would be one sector expected to underperform while defensive sectors like Utilities would outperform. Looking at the relative strength of the two sectors, however, the market’s message hasn’t exactly confirmed the headlines.
The chart below shows the ratio in closing prices between the S&P 500 Industrials sector ETF (XLI) versus the Utilities sector (XLU). When the line is rising, the Industrials sector is outperforming Utilities and vice versa. Over the last five years, there have been two distinct troughs in the chart. The first was in March 2020 while the next was last September. Back in late February, it looked as though the ratio was on the verge of hitting new five-year highs, but the bank failures and run on deposits stopped the relative outperformance of Industrials right in its tracks. It’s still too early to tell whether this will be a temporary pause or a new leg lower in the ratio, but with banks kicking off earnings season later this week, the tone of companies giving their results will shed a lot of light on that answer. At this point, if the market really was convinced of an impending recession, this ratio would likely be falling much faster.
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Apr 10, 2023
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“I don’t think one should ever be satisfied with any objective that you’re trying to accomplish because perfection is never attained.” – Fred Ridley
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With European markets closed for Easter and many Asian markets also still on holiday, it’s been a quiet pre-market session. Chinese stocks were open for trading, though, and they traded modestly lower. S&P 500 futures have been weakening into the open with the Nasdaq leading the way lower, as some of the tech sector’s outperformance this year gets unwound. Friday’s employment report has also raised the odds of a 25-bps hike at the May meeting to better than a two-in-three chance.
Enjoy the quiet while it lasts because earnings season kicks off at the end of this week when the major banks start to report on Friday with Blackrock (BLK), Citi (C), JPMorgan Chase (JPM), PNC (PNC), and Wells Fargo (WFC) all on the calendar. Outside of these banks, the only other notable reports this week will be Delta (DAL) on Thursday and UnitedHealth (UNH) on Friday.
It may be a dull start to the week for stocks, and from a bull’s perspective, dull is good. Historically, the week following Easter has been better than normal. Since 1945, the S&P 500’s median performance during Easter week has been a gain of 0.54% with positive returns just under 60% of the time. For all weeks in the post-WWII period, the S&P 500’s median weekly performance has been just over half of that at a gain of 0.29% with positive returns 56.6% of the time.
Breaking out performance further by how the market was performing YTD heading into the holiday when the S&P 500 was up on the year heading into Easter the median performance during Easter week was a gain of 0.67% with gains 61.7% of the time. That compares to a gain of just 0.20% in years when it was down YTD. Recall that last year, the S&P 500 was down 7.8% heading into Easter and declined 2.8% during Easter week.
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Apr 6, 2023
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“If you want to make enemies, try to change something.” – Woodrow Wilson
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It hasn’t been an especially good week for economic data so far with notable weakness in employment-related data. Besides the JOLTS and ADP reports which were weaker than expected, the employment component of the ISM Manufacturing report was the lowest in over two years while the employment component of the Services report declined relative to February and is barely clinging to positive territory. Initial Jobless Claims were also just released and came in at 228K relative to expectations for 200K. Continuing Claims were 1.823 mln versus forecasts for 1.7 mln. Initial Claims were the highest since last December while Continuing Claims were the highest since December 2021 So, you can add more weak employment data to this week’s pile. In reaction to the report, futures saw a modest tick lower but nothing major.
All of these indicators are a sideshow, though. Tomorrow’s Non-Farm Payrolls report will either confirm the weakness we have seen in these indicators or render them irrelevant (for a few days at least). Unfortunately, the equity market will be closed for the main event in observance of Good Friday. Bond markets will be open, and lately, they’ve been more volatile than the stock market anyway, so don’t think there won’t be any fireworks. And if that isn’t enough for you, crypto never sleeps!
Open or closed tomorrow, we’ll be watching to see if another epic streak can continue or come to an end. Monthly Non-Farm Payrolls have come in better than expected for eleven straight months, so a better-than-expected report would make it a full year. Never before has the been a streak that long or for that matter even half as long.
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Apr 5, 2023
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“He was sitting over there, waiting like a possum for something to happen.” – Joe Torre
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Futures are indicating another weaker open this morning after this morning’s weaker-than-expected ADP Private Payrolls report. In what is a big week for employment data, we’re currently 0-2 (weaker than expected JOLTS and ADP) with jobless claims on deck tomorrow and the Non-Farm Payrolls report in the hole on Friday.
September 20th, 1998 seemed like just a normal night in Baltimore. Heading into the last home game of the season, the Orioles were just two games over .500 and out of the post-season with only the Devil Rays separating them from last place. For most fans, the only reason to go to the game was that they were playing the Yankees who were having one of the best regular seasons of all time and on their way to sweeping the Padres in the World Series. Plus, it was a good weather night for baseball with temperatures in the high 60s. What fans heading into Camden Yards that night didn’t know was that they would leave with an unforgettable memory. No, it wasn’t bobblehead night. It was even better as one of the most iconic records in sports came to an end as Cal Ripken pulled himself from the lineup and ended his iron-man streak of 2,632 consecutive games.
Compared to the environment three years earlier when Lou Gehrig’s ‘unbreakable’ streak of 2,130 games that stood for 56 years was broken, there wasn’t much celebration around the end of Ripken’s streak. The Yankees did come out of the dugout to tip their cap to Ripken and the fans gave him a standing ovation and two curtain calls. But while the whole country watched as Ripken broke the streak in 1995, most Americans didn’t find out about the streak ending until the next morning. The Orioles ended up losing 5-4 as ‘El Duque’ notched his 11th win and the 107th for the Yankees.
In the markets yesterday another record streak ended with even less fanfare than Ripken’s, and chances are that even the morning after, you never even knew about it. After yesterday’s weak economic data, the 10-year yield finished the day at 3.34% which was its lowest close since early last September, marking the first time that the 10-year Treasury yield closed at a six-month low since – wait for it – August 2020! That 664-trading day stretch without a six-month closing low in the 10-year yield was the longest streak in the history of the data going back to at least 1962.
Admittedly, this was a much more obscure streak than Gehrig’s ‘unbreakable’ streak that stood in place for 56 years, but this was something that hasn’t been done in at least 61 years. Also, when you think about it, a run in the 10-year yield that kept it from closing at a six-month low for nearly three years definitely had more of a real-world impact on the lives of Americans (and people around the world for that matter) than any streak of Gehrig’s, Ripken’s, or anyone else who follows them.
Our Morning Lineup keeps readers on top of earnings data, economic news, global headlines, and market internals. We’re biased (of course!), but we think it’s the best and most helpful pre-market report in existence!
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